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The Facultative Certificate at issue contained an endorsement with a heading reading: “London Arbitration and Governing Law (UK and Bermuda Insurers Only),” which provided for arbitration in London. That endorsement was contrary to a clause in the main Certificate providing for arbitration in New York. First Mutual initiated arbitration in London. Infrassure sought a declaration that the endorsement did not apply, so the arbitration should be in New York. First Mutual argued that the heading to the endorsement was subject to a separate “Titles Clause,” which provides that titles in the contract are for mere convenience, and not meant to limit or affect the provisions to which they relate.

The key issue was whether the words “UK and Bermuda Insurers Only,” even though part of a title, would be given effect. Infrassure argued that these were not merely a title, but contained substantive instructions. The Second Circuit held that the disputed language “is not part of the title itself, though it shares the same line and bolded format.” It wrote that “the purpose of a Titles clause is not to strip away an express indication as to the context in which a particular provision is operative, but to ensure that the text of a provision is not discounted or altered by the words of its heading.” Thus, because the endorsement was expressly limited to UK and Bermuda insurers, and neither Infrassure nor First Mutual was a UK or Bermuda insurer, the Court applied the provision in the main Certificate, calling for arbitration in New York.

The decision was written by Judge Dennis Jacobs who, as a litigation partner at Simpson Thatcher decades ago, had much experience in reinsurance disputes. This experience was apparent in the decision. For example, he noted that that one of the paragraphs in the Certificate reads in its entirety as follows:

Program Policy Limits

Various as per the attached schedule.

Judge Jacobs noted that paragraphs like this would be rendered meaningless unless operative effect was given to the words on the title.

10/31/2016

Keyspan Gas East Corp. v. Munich Reinsurance Am., Inc., 2016 WL 4543479 (N.Y. App. Div. 1st Dep’t Sept. 1, 2016). New York’s Appellate Division, First Department held that Century Indemnity Co. is not required to indemnify gas producer Keyspan Gas East Corporation for environmental cleanup costs arising out of time periods when pollution liability coverage was not available on the market. Keyspan and its predecessors owned manufactured gas plants that deposited hazardous waste into surrounding groundwater over a period of many decades. Keyspan sought indemnification from Century for the time that it held a general liability policies with the insurer, 1953 through 1969, and also for the period of time during which such insurance was unavailable in the market. The lower court held that that a pro rata time on the risk allocation formula was appropriate to determine each insurers’ respective liability, and that Century was liable for damage that occurred during the periods in which insurance coverage was not available.

On appeal, the First examined the relevant language of the policies that explicitly stated in some policies that “the policy applies only to occurrences . . . during the policy period” and in other policies that the policies applied to “property damage . . . which occurs anywhere during the policy period.” Thus, the Appellate Division reversed the lower court and held that “Century is not responsible for any part of the cleanup for periods of time when insurance was unavailable . . . .”

10/28/2016

First Mercury Ins. Co. v. Shawmut Woodworking & Supply, Inc., 2016 WL 4507891 (2d Cir. Aug. 29, 2016). The Second Circuit held in a summary order that a construction manager of a project at Yale University was entitled to coverage as an additional insured under a sub-subcontractor’s insurance policy with First Mercury Insurance Co. Fast Trek Steel, Inc., was subcontracted by Shepard Steel Co., who in turn was subcontracted by the general project manager Shawmut Woodworking & Supply, Inc. Plaintiffs in the underlying suit were Fast Trek employees that sued Shawmut and Shepard after steel beams collapsed on site, causing multiple injuries and one death. Fast Trek had a general commercial liability policy with First Mercury that named as an additional insured “any person or organization for whom [Fast Trek] is performing operations when [Fast Trek] and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on [Fast Trek’s] policy.” The agreement between Fast Trek and Shepard required that Fast Trek name both Shepard and “the Project manager and construction manager” as additional insureds. Shawmut sought defense and indemnification from First Mercury. First Mercury sought a declaration that it did not have a duty to defend or indemnify Shawmut or Shepard. Applying Connecticut law, the district court denied First Mercury’s motion and held that Shepard and Shawmut were additional insureds under the Fast Trek policy.

On appeal, First Mercury argued that the Fast Trek policy required Shawmut and Fast Trek to agree, in writing, to name Shawmut as an additional insured. The court found that this requirement in fact was met when Fast Trek, in a written agreement with Shepard, agreed to name both Shepard and “the Project owner and construction manager” as additional insureds. Fast Trek’s agreement with Shepard further incorporated an agreement between Shawmut and Shepard that required Shepard and “each sub-subcontract” name Shawmut as an additional insured. The court then considered First Mercury’s argument that the policy required Shawmut and Fast Trek to enter into a single agreement with each other. It dismissed this argument as contrary to the policy language, and further found that Fast Trek and Shepard’s agreement explicitly incorporating Shawmut as an additional insured would have created the requisite contractual privity. The second issue on appeal was whether coverage under the First Mercury policy was limited to vicarious liability claims, or injuries caused by Fast Trek’s own acts or negligence. The court did not find any language specifying as much, so it held that if the parties had intended coverage to be limited to vicarious liability the policy language should have clearly manifested this intent.

Fox manufactures items such as paper plates and plastic silverware, and has offices and a warehouse in Brooklyn, New York. Sano procured insurance for Fox’s properties from Hanover Insurance Company (“Hanover”). Fox suffered damage arising from Superstorm Sandy, but Hanover denied coverage on the grounds that its policy did not cover flood-related losses.

The Court held that New York law applied to analyzing Sano’s standard of care. In doing this, the Court highlighted a significant difference between New Jersey and New York law concerning insurance brokers. Under New Jersey law, once a broker agrees to procure insurance for a client, it must carry out is responsibilities in to with its client. Conversely, under New York law, brokers are not held to the standard of a licensed professional fiduciary, and can be held to the standard of a fiduciary only if it can be factually established that the broker is in a special position of trust with the client.

This case will proceed with discovery to determine whether, under New York law, Sano was in a special position of trust with Fox.

10/12/2016

The University of Pittsburgh v. Lexington Ins. Co., 1:13-CV-00335, 2016 WL 4166173 (S.D.N.Y September 16, 2016). The Southern District of New York held that Lexington Insurance Company (“Lexington”) does not have to cover a claim arising from delays associated with a $40 million project on the University of Pittsburgh (“Pitt”) campus, finding that Lexington’s policyholder, The Ballinger Company (“Ballinger”), the architect in charge, failed to provide sufficient notice of a claim.

Ballinger purchased a claims-made insurance policy with Lexington covering the period from February 1, 2011 to February 1, 2012. Ballinger switched insurance companies to Axis following the termination of the Lexington policy. On the last day of the coverage period for the Lexington policy, Ballinger filed a notice of claim. Previously, in an order denying Pitt’s partial motion for summary judgment, the court held that Ballinger’s “notice,” which expressed Ballinger’s concerns about the project’s “problems and delays” and of “trouble brewing at Pittsburgh,” was insufficient to meet the conditions precedent to coverage. In particular, the court found that the Lexington policy required the insured to provide: an indication of the actual or alleged breach of any professional duty; a description of the professional services rendered which may result in the claim; or a description of the injury or damage that has or may result in a claim.

Following the court’s decision on Plaintiff’s motion for partial summary judgment, and as directed by the court, Lexington filed a motion for summary judgment on the issue of whether there is coverage for Pitt on Ballinger’s claim. In its opposition, Pitt argued that Ballinger’s failure to comply with the specific requirements of the contract’s notice provisions should be excused because Ballinger’s compliance was “substantial.” The court rejected this argument outright, noting that if Pitt’s argument were “credited, any purchaser of a claims-made policy could effectively transform it into a broader (and typically more expensive) occurrence policy by asserting nebulous ‘claims’ with specificity to be filled in only later, on the last day of the policy.” In response to Plaintiff’s argument that Ballinger should not be punished for submitting notice of a potential claim on the last day, the court responded that the timing of the notice has nothing to do with the rationale for the result – the problem is that the notice is sorely deficient, not that it was made on the last possible day. Finally, Pitt contended that precluding recovery under the Lexington policy may create a “Catch-22” of no coverage under either the Lexington or the Axis policy, because under the Lexington policy Ballinger did not have enough knowledge of potential claims, and under the Axis policy, Pitt speculates that Ballinger had too much knowledge of potential claims. The court found this argument similarly unavailing, noting that whether Pitt can recover against Axis is not before the court, and that the claims against Lexington and Axis do not “rise and fall together,” as they involved different contracts and different facts. Furthermore, the court reasoned that granting Lexington’s motion for summary judgment does not necessarily preclude Pitt from pursuing recovery from Axis under that separate policy. Thus, the court granted Lexington’s motion for summary judgment and Lexington was terminated as a defendant in the case.

10/05/2016

Vince Vitkowsky recently addressed the Property Casualty Insurance Association of America on Cybersecurity and the Board of Directors. His White Paper provides an overview of sources of regulation and guidance, and suggests possible action items for insurance company Boards. You can find it here.

10/04/2016

Tesoro Ref. and Mktg. v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. 15-50405, 2016 WL 4166173 (5th Cir. July 29, 2016). The Fifth Circuit held that National Union Fire Insurance Company did not have to cover $15 million of a $90 million loss that Tesoro Refining and Marketing sustained after continuing to sell fuel on an unsecured basis to Enmex Corporation. From 2003 to 2008 Tesoro sold fuel on credit to petroleum distributor Enmex. The account was unsecured with a credit limit of $25 million. Over the next five years Calvin Leavell, Tesoro’s Credit Director, forged letters of credit in an effort to mollify Tesoro’s risk management offices so the company would continue to sell fuel to Enmex. In 2008, with Enmex’s balance fast approaching $90 million, Tesoro asked for the first time to see the forged $24 million letter of credit. Tesoro then presented the letter to Bank of America for authentication and the bank informed Tesoro that the letter was invalid. Tesoro sued Enmex for breach of contract and fraud, and the case settled. Tesoro then submitted proof of loss to National under its commercial crime policy. The insurer denied coverage. Tesoro sued National and moved for partial summary judgment, arguing that the “Employee Theft” insuring agreement covered losses resulting from employee forgery even if that forgery did not result in theft. National cross moved for partial summary judgment and the district court agreed with the insurer that “Employee Theft” agreement required that, to trigger coverage, the act of forgery had to have resulted in theft.

On appeal, the Fifth Circuit first addressed whether the “Employee Theft” agreement always required a showing of theft to triggering coverage. The agreement stated “We will pay for loss of or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee.’” Under the agreement “theft” also included “forgery.” The policy defined “theft” as “the unlawful taking of property to the deprivation of the Insured.” Tesoro argued that forgery was a type of theft covered under the policy. The Fifth Circuit disagreed, finding that the inclusion of “unlawful taking” as the definition of theft made clear that only forgery that leads to such a taking is covered. The Court then considered the meaning of “unlawful taking.” Tesoro argued that an unlawful taking is any theft as defined under Texas law, specifically theft by deception. The court looked to the Texas Penal Code and relevant case law for guidance, and determined that theft by deception requires that the owner of the stolen property relied on the thief’s inducement/deception in misappropriating the property. The court reasoned that to survive summary judgment Tesoro had to allege a genuine dispute of material fact existed regarding whether the documents that Leavell forged substantially affected the company’s decision to continue selling fuel to Enmex. Tesoro, however, never explained how the decision-making process to continue selling fuel to Enmex worked, or whether the forged letters of credit affected that process. In fact, the evidence suggestd the opposite, that the forged letters had no effect on Tesoro’s decision to continue selling fuel to Enmex. Although Enmex consistently failed to pay for the fuel, the record indicated that it was considered a valuable customer – Tesoro had already authorized Enmex to run up a balance of at least $15 million its $25 million limit. Furthermore, Tesoro continued to sell fuel to Enmex even after the forged letters of credit, which officials at the time believed to be legitimate, had expired. Thus, the Court upheld the lower court’s decision granting National’s motion for partial summary judgment.

09/29/2016

X2 Biosystems, Inc. v. Fed. Ins. Co., No. 14-35125, 2016 WL 4120694 (9th Cir. Aug. 3, 2016). The Ninth Circuit held that damages stemming from X2 Biosystem’s breach of a licensing contract with Bite Tech Incorporated was not covered under an insurance policy issued to X2 by Federal Insurance Company. In 2011 X2 entered into a Technology Licensing Agreement (“TLA”) with Bite Tech that granted Bite Tech a license to certain X2 technology. The TLA provided that Bite Tech pay X2 $2 million in advance royalties as consideration for the agreement. After X2 received the advance royalties it breached the TLA without having generated any revenue for Bite Tech. Bite Tech sued X2, alleging seven causes of action including breach of a special relationship and conversion. Federal refused to defend X2. X2 brought a declaratory judgment action, claiming Federal breached its duty to defend and the covenant of good faith and fair dealing. Federal cross-moved to dismiss X2’s complaint and X2 moved for partial summary judgment. The federal district court below denied X2’s motion and dismissed the company’s complaint with prejudice.

Federal cited a policy exclusion in denying coverage for claims arising or resulting from X2’s liability “under any contract.” Bite Tech alleged in the underlying complaint that in entering the TLA, the two companies had formed a “special relationship” that gave rise to a duty to disclose when either party was planning on terminating the agreement. Federal argued, and the court agreed, that X2’s duty to disclose therefore “arose out of” X2’s contractual liability under the agreement, because absent the agreement no such duty would exist. Bite Tech’s conversion claim similarly “arose out of” contractual liability, because the advance royalty payments were received as consideration for the TLA and were thus related to X2’s contractual liability.

The First Appellate Department recently determined that the language of an additional-insured endorsement of a commercial general liability insurance policy required a direct written contract between the named insured and the company claiming to be an additional insured, despite the insured naming the other company as an additional insured on its policy.

The Dormitory Authority of the State of New York (“DASNY”) entered into a contract with Gilbane Building Co./TDX Construction Corp (“Gilbane/TDX”) to serve as the construction manager for a 15-story building. DASNY entered into a separate contract with Samson Construction Co. (“Samson”), whereby Samson would be the primary contractor responsible for the foundation and excavation work. Under the contract, Samson agreed to procure commercial general liability insurance with an endorsement naming DASNY, Gilbane/TDX, and a number of other parties, as additional insureds. Samson obtained a policy from Liberty Insurance Underwriters (“Liberty”), which stated that an insured under the policy was “any person or organization with whom [Samson] agreed to add as an additional insured by written contract.”

In 2006, DASNY sued Samson and the Architect on the project, alleging negligent foundation and excavation work which caused significant structural damage to adjacent buildings. In 2010, the Architect filed a third-party action against Gilbane/TDX. Gilbane/TDX sought defense and indemnification from Liberty, which denied coverage arguing that Gilbane /TDX did not qualify as an additional insured under Samson’s policy. Gilbane/TDX filed a declaratory action in New York County Supreme Court and Liberty moved for summary judgment. The trial court denied Liberty’s motion and recognized Gilbane/TDX as an additional insured under the policy. The Supreme Court found that Liberty’s “written contract” requirement was met by Samson’s contract with DASNY, which obligated Samson to procure coverage for Gilbane/TDX.

The Appellate Court reversed holding that Gilbane/TDX was not an additional insured under Liberty’s policy. In a 4-1 decision, the Appellate Division reasoned that the language of the Liberty policy clearly and unambiguously required the named insured to execute a contract with the party seeking coverage as an additional insured. The Court reasoned that coverage extended only to those “with whom” the insured agreed and not “for whom” the insured may have agreed to provide coverage. The Court mentioned that Samson’s agreement with DASNY to provide coverage for Gilbane/TDX may provide Gilbane/TDX with a claim against Samson for breach of the contract’s insurance provision. The Court cited to two prior decisions in support of its interpretation: AB Green Gansevoort, LLC v. Peter Scalamandre & Sons, Inc., 102 AD3d 425 (1st Dep’t 2013) and Linarello v. City Univ. of N.Y., 6 AD3d 192 (1st Dep’t 2004).